<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 26, 1999
Commission file number 1-12082
HANOVER DIRECT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 13-0853260
(State of incorporation) (IRS Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
(Address of principal executive offices) (Zip Code)
</TABLE>
(201) 863-7300
(Telephone number)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
--- ---
Common stock, par value $.66 2/3 per share: 211,179,303 shares outstanding as
of August 6, 1999.
<PAGE> 2
HANOVER DIRECT, INC.
FORM 10-Q
JUNE 26, 1999
INDEX
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<CAPTION>
Page
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
June 26, 1999 and December 26, 1998.................................................. 3
Condensed Consolidated Statements of Income (Loss) - thirteen and
twenty-six weeks ended June 26, 1999 and June 27, 1998 .............................. 5
Condensed Consolidated Statements of Cash Flows - twenty-six weeks ended
June 26, 1999 and June 27, 1998...................................................... 6
Notes to Condensed Consolidated Financial Statements - twenty-six weeks
ended June 26, 1999 and June 27, 1998................................................ 7
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations..............................................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................17
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders..............................18
Item 6. Exhibits and Reports on Form 8-K.................................................18
Signatures....................................................................................19
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 26, DECEMBER 26,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents (Note 3) $ 7,127 $ 12,207
Accounts receivable, net 17,427 22,737
Accounts receivable under financing agreement 17,345 18,998
Inventories 53,310 62,322
Prepaid catalog costs 20,791 16,033
Deferred tax asset, net 3,300 3,300
Other current assets 3,061 2,402
--------- ---------
Total Current Assets 122,361 137,999
--------- ---------
Property and equipment, at cost:
Land 4,634 4,634
Buildings and building improvements 22,735 22,724
Leasehold improvements 9,392 9,303
Furniture, fixtures and equipment 51,778 51,193
Construction in progress 518 113
--------- ---------
89,057 87,967
Accumulated depreciation and amortization (42,034) (37,884)
--------- ---------
Net Property and Equipment 47,023 50,083
Goodwill, net 16,597 16,890
Deferred tax asset, net 11,700 11,700
Other assets, net 2,060 2,198
--------- ---------
Total Assets
$ 199,741 $ 218,870
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 26, DECEMBER 26,
1999 1998
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease obligations $ 2,577 $ 2,573
Accounts payable 47,263 64,594
Accrued liabilities 22,366 22,212
Customer prepayments and credits 4,860 4,691
--------- ---------
Total Current Liabilities 77,066 94,070
--------- ---------
Non-current Liabilities:
Long-term debt 45,133 37,288
Obligations under accounts receivable financing 17,345 18,998
Other 2,098 2,044
--------- ---------
Total Noncurrent Liabilities 64,576 58,330
--------- ---------
Total Liabilities 141,642 152,400
--------- ---------
Shareholders' Equity:
Series B Preferred Stock, convertible, $.01 par value,
authorized and issued 634,900 shares 6,223 6,128
Common Stock, $.66 2/3 par value, authorized 300,000,000 and
225,000,000 shares; issued 211,158,303 and 210,785,688
shares at June 26, 1999 and December 26, 1998, respectively 140,772 140,524
Capital in excess of par value 299,322 297,751
Accumulated deficit (384,150) (373,815)
--------- ---------
62,167 70,588
Less:
Treasury stock, at cost (358,303 shares at June 26, 1999
and December 26, 1998) (813) (813)
Notes receivable from sale of Common Stock (3,255) (3,305)
--------- ---------
Total Shareholders' Equity 58,099 66,470
--------- ---------
Total Liabilities and Shareholders' Equity $ 199,741 $ 218,870
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
JUNE 26, JUNE 27, JUNE 26, JUNE 27,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 131,237 $ 134,562 $ 258,951 $ 259,097
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales and operating expenses 82,624 83,659 164,528 162,360
Write-down of inventory of discontinued
catalogs (324) -- (324) --
Selling expenses 34,072 37,080 66,018 71,068
General and administrative expenses 15,882 13,737 30,329 26,210
Depreciation and amortization 2,243 2,453 4,544 4,790
------------- ------------- ------------- -------------
134,497 136,929 265,095 264,428
------------- ------------- ------------- -------------
Loss from operations (3,260) (2,367) (6,144) (5,331)
------------- ------------- ------------- -------------
Interest expense, net (2,333) (2,242) (3,480) (3,677)
------------- ------------- ------------- -------------
Loss before income taxes (5,593) (4,609) (9,624) (9,008)
Income tax provision (201) (250) (394) (500)
------------- ------------- ------------- -------------
Net loss (5,794) (4,859) (10,018) (9,508)
Preferred stock dividends and accretion (158) (158) (317) (280)
------------- ------------- ------------- -------------
Net loss applicable to common shareholders $ (5,952) $ (5,017) $ (10,335) $ (9,788)
============= ============= ============= =============
Basic and diluted net loss per share $ (.03) $ (.02) $ (.05) $ (.05)
============= ============= ============= =============
Weighted average shares outstanding 210,634,049 203,982,414 210,539,416 203,885,594
============= ============= ============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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<CAPTION>
26 WEEKS ENDED
----------------------------
JUNE 26, JUNE 27,
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(10,018) $ (9,508)
Adjustments to reconcile net loss to net cash used
By operating activities:
Depreciation and amortization, including deferred fees 5,705 5,706
Provisions for doubtful accounts 1,143 1,734
Compensation expense related to stock options 1,394 1,180
Changes in assets and liabilities:
Accounts receivable 5,310 (3,414)
Inventories 9,012 (10,367)
Prepaid catalog costs (4,758) (3,663)
Accounts payable (17,331) 229
Accrued liabilities (989) (9,729)
Customer prepayments and credits 169 (338)
Other, net (734) (713)
-------- --------
Net cash used by operating activities (11,097) (28,883)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (1,010) (4,108)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds under Credit Facility $ 8,545 $ 22,647
Payments of debt and capital lease obligations (830) (641)
Payment of debt issuance costs (998) (1,088)
Proceeds from issuance of Common Stock 425 441
Other, net (115) 120
-------- --------
Net cash provided by financing activities 7,027 21,479
-------- --------
Net decrease in cash and cash equivalents (5,080) (11,512)
Cash and cash equivalents at the beginning of the year 12,207 14,758
-------- --------
Cash and cash equivalents at the end of the period $ 7,127 $ 3,246
======== ========
Supplemental cash flow disclosures:
Interest paid $ 2,186 $ 2,238
======== ========
Income taxes paid $ 579 $ 420
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
TWENTY SIX WEEKS ENDED JUNE 26, 1999 AND JUNE 27, 1998
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions for Form 10-Q
and, therefore, do not include all information and footnotes necessary for a
fair presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. Reference should be
made to the annual financial statements, including the footnotes thereto,
included in the Hanover Direct, Inc. (the "Company") Annual Report on Form 10-K
for the fiscal year ended December 26, 1998. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements
contain all material adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial condition, results of operations and
cash flows of the Company and its consolidated subsidiaries for the interim
periods. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the entire year. Certain prior year amounts
have been reclassified to conform to the current year presentation.
2. REVENUE RECOGNITION/DEFERRED EXPENSES-SHOPPER'S EDGE BUYING CLUB
Membership fees are billed through clients of the Company primarily
through credit cards. An allowance for cancellations is established based on the
Company's most recent actual cancellation experience, updated regularly.
Deferred membership fees are recorded, net of estimated cancellations, when the
trial period has elapsed and are amortized as revenues from membership fees on a
straight-line basis over the remainder of the membership period, generally
twelve months. Membership cancellations are charged to the allowance for
cancellations on a current basis. During an initial annual membership term or
renewal term, a member may cancel his or her membership in this program,
generally for a complete refund of the membership fee for that period.
Membership solicitation costs, which include telemarketing, printing,
postage (excluding membership kit postage) and mailing costs related directly to
membership solicitation (i.e. direct response advertising costs) are deferred
and charged to operations as revenues from membership fees are recognized, in
accordance with Statement of Position 93-7, "Reporting on Advertising Costs".
Other deferred costs consist of commissions paid to service providers and
transaction processing fees, which relate to the same revenue streams as the
direct marketing costs and are also charged to income over the membership
period.
3. CASH AND CASH EQUIVALENTS-RESTRICTED CASH
The Company is contractually restricted under the 1999 Shopper's Edge
Upsell agreement to usage and withdrawal of cash generated by the program. The
agreement requires that cash provided by membership fees be utilized to fund
program-related operating expenses and membership fee reimbursements resulting
from cancellations. However, withdrawals of commissions based upon
pre-determined formulas within the agreement are made by the Company
periodically. As at June 26, 1999, approximately $2.3 million of the total $7.1
million cash balance was subject to the above restrictions.
4. RETAINED EARNINGS RESTRICTIONS
The Company is restricted from paying dividends at any time on its
Common Stock or from acquiring its capital stock by certain debt covenants
contained in agreements to which the Company is a party.
7
<PAGE> 8
5. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of
common shares outstanding in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The
weighted average number of shares used in the calculation for both basic and
diluted net loss per share excludes warrants, stock options and convertible
preferred stock because a net loss was incurred for the periods reported in the
accompanying condensed consolidated statements of income (loss).
6. RESTRUCTURING RESERVES
The remaining restructuring reserves established in 1996 are primarily
comprised of facility exit/relocation costs. Facility exit/relocation costs are
primarily related to the Company's decision to sublet a portion of its
Weehawken, NJ corporate facility and to consolidate its distribution centers in
Roanoke, VA. Remaining reserves for restructuring costs approximated $2.5
million and $3.3 million at June 26, 1999 and December 26, 1998, respectively,
and are included in accrued liabilities in the accompanying condensed
consolidated balance sheets.
7. LONG-TERM DEBT
The Company's long-term credit arrangement with Congress Financial
Corporation is comprised of a revolving line of credit of up to $65 million
("Congress Revolving Credit Facility") and term loans aggregating $14 million
("Revolving Term Notes") expiring on January 31, 2001. At June 26, 1999, the
Company had borrowings of $8.5 million under the Congress Revolving Credit
Facility and $13.3 million in Revolving Term Notes. The rates of interest
related to the Congress Revolving Credit Facility and Revolving Term Notes at
June 26, 1999 were 8.25% and 7.81%, respectively. The face amount of unexpired
documentary letters of credit were $7.1 million and $4.5 million at June 26,
1999 and June 27, 1998, respectively.
The Congress Revolving Credit Facility is secured by all the assets of
the Company. Borrowings under the Congress Revolving Credit Facility are based
on percentages of eligible inventory and accounts receivable. The Congress
Revolving Credit Facility places limitations on the incurrence of additional
indebtedness and requires the Company to maintain minimum net worth and working
capital throughout the term of the agreement. At June 26, 1999, the Company was
in compliance with such covenants and remaining unused availability under the
Congress Revolving Credit Facility was $26.8 million.
In March 1999, the term of the letter of credit guarantee issued by
Richemont Finance S.A. ("Richemont") was extended to March 31, 2000. As
consideration, the Company agreed to pay Richemont a fee of 9.5% of the
principal amount of the letters of credit. At June 26, 1999, borrowings
supported by the letter of credit guarantee were $25.0 million.
8
<PAGE> 9
8. SEGMENT INFORMATION
During 1999, the Company decided to reposition its operations into two
separate units, Brand Marketing and Web Services, each representing the overall
strategic initiatives of the Company. This represents a change from 1998, when
the Company operated only in one segment - direct marketing. The Brand Marketing
division is primarily comprised of the Company's branded portfolio of specialty
catalogs and related retail operations, the Company's e-commerce web site
portfolio relating to each of the Company's catalogs, and products and services
provided by the Company's upsell programs. The Web Services division consists of
the Company's Internet marketing services group, its telemarketing and
fulfillment operations, information systems platform and corporate
administration. Revenues for the Brand Marketing division are derived primarily
from the sale of merchandise through the Company's catalog and related
e-commerce product offerings. Other sources of revenue include various upsell
initiatives and other catalog related revenue. Revenues for the Web Services
division include charges to the Brand Marketing division pursuant to
intercompany service agreements and revenues in connection with the Company's
fulfillment services and e-commerce services provided to third parties.
The aforementioned intercompany service agreements, which became
effective as of January 1, 1999, provide for the billing by Web Services of web
hosting, system interface and fulfillment services provided on a "for profit"
basis. These costs are primarily comprised of telemarketing and distribution
costs as well as certain general and administrative costs (including information
systems and corporate services provided).
Based on the above, reportable segment data were as follows:
<TABLE>
<CAPTION>
IN THOUSANDS OF DOLLARS
------------------------------------------------------------------------
RESULTS FOR THE 2ND QUARTER BRAND WEB CONSOLIDATED
ENDED JUNE 26, 1999: MARKETING SERVICES UNALLOCATED TOTAL
--------- -------- ----------- -----
<S> <C> <C> <C> <C>
Revenues from external customers $ 130,185 $ 1,052 $ -- $ 131,237
Intersegment Revenues -- 24,967 (24,967) --
Income/(loss) from operations 1,737 (4,997) -- (3,260)
Interest Income/(Expense) (585) (1,748) -- (2,333)
--------- --------- --------- ---------
Income/(loss) before income taxes 1,152 (6,745) -- (5,593)
Total Assets at June 26, 1999 145,698 38,925 15,118 199,741
RESULTS FOR THE 2ND QUARTER
ENDED JUNE 27, 1998:
Revenues from external customers $ 134,294 $ 268 $ -- $ 134,562
Intersegment Revenues -- 26,490 (26,490) --
Income/(loss) from operations (2,177) (190) -- (2,367)
Interest Income/(Expense) (912) (1,330) -- (2,242)
--------- --------- --------- ---------
Income/(loss) before income taxes (3,089) (1,520) -- (4,609)
Total Assets at June 27, 1998 172,209 43,754 15,830 231,793
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
RESULTS FOR THE SIX MONTHS BRAND WEB CONSOLIDATED
ENDED JUNE 26, 1999: MARKETING SERVICES UNALLOCATED TOTAL
--------- -------- ----------- -----
<S> <C> <C> <C> <C>
Revenues from external customers $ 257,198 $ 1,753 $ -- $ 258,951
Intersegment Revenues -- 49,984 (49,984) --
Income/(loss) from operations 2,443 (8,587) -- (6,144)
Interest Income/(Expense) (879) (2,601) -- (3,480)
--------- --------- --------- ---------
Income/(loss) before income taxes 1,564 (11,188) -- (9,624)
RESULTS FOR THE SIX MONTHS
ENDED JUNE 27, 1998:
Revenues from external customers $ 258,478 $ 619 $ -- $ 259,097
Intersegment Revenues -- 52,882 (52,882) --
Income/(loss) from operations (6,047) 716 -- (5,331)
Interest Income/(Expense) (1,213) (2,464) -- (3,677)
--------- --------- --------- ---------
Income/(loss) before income taxes (7,260) (1,748) -- (9,008)
</TABLE>
The Company uses income (loss) from operations as the measurement of
segment profit or loss. As income taxes are centrally managed at the corporate
level, deferred tax assets are not allocated by segment.
As previously mentioned, the intercompany service agreements were
effective as of January 1, 1999. Had the provisions of the intercompany service
agreements been in effect in 1998, intersegment revenues for the Web Services
division would have been approximately $26.7 million and $52.7 million for the
thirteen weeks and twenty six weeks ended June 27, 1998, respectively.
Income/(loss) from operations would have been approximately $0.1 million and
$(2.5) million for the Web Services and Brand Marketing divisions, respectively,
for the thirteen weeks ended June 27, 1998. Income/(loss) from operations would
have been $0.6 million and $(5.9) million for the Web Services and Brand
Marketing divisions, respectively, for the twenty six weeks ended June 27, 1998.
10
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, the
percentage relationship to revenues of certain items in the Company's Condensed
Consolidated Statements of Income (Loss).
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------------------
JUNE 26, JUNE 27,
1999 1998
---- ----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales and operating expenses 62.7 62.2
Selling expenses 26.0 27.6
General and administrative expenses 12.1 10.2
Depreciation and amortization 1.7 1.8
Loss from operations (2.5) (1.8)
Interest expense, net ( 1.8) (1.7)
Net loss (4.4)% (3.6)%
</TABLE>
RESULTS OF OPERATIONS- THIRTEEN-WEEKS ENDED JUNE 26, 1999 COMPARED WITH
THIRTEEN-WEEKS ENDED JUNE 27, 1998
Net Loss. The Company reported a net loss of $(5.8) million or $(.03)
per share for the thirteen-weeks ended June 26, 1999 compared with a net loss of
$(4.9) million or $(.02) per share for the comparable period last year. The per
share amounts were calculated based on weighted average shares outstanding of
210,634,049 and 203,982,414 for the current year and prior year period,
respectively. This increase in weighted average shares was due to an exercise of
warrants in July 1998 by Richemont Finance S. A.
The net loss for the thirteen-weeks ended June 26, 1999 was primarily
the result of the seasonality of the Company's business and increased costs (of
approximately $3.0 million) related to the Company's strategic initiatives,
which include e-commerce, as well as underabsorbed overhead costs related to the
start-up of the Company's third party fulfillment business (see Note 8 "Segment
Information"). These losses were partly offset by higher demand for the
Company's core catalog offerings and 1999 earnings versus 1998 losses associated
with the Company's non-core catalogs. The seasonality of the Company's business
is such that the sales volumes achieved during the second quarter are not
sufficient to cover both its fixed costs and the costs for its strategic
initiatives for such period.
Compared to the comparable period last year, the increase in net loss was
primarily due to:
(i) costs related to the Company's strategic initiatives
partially offset by,
(i) better catalog productivity
(ii) higher catalog margins and
(iii) 1999 earnings versus 1998 losses from non-core catalogs
11
<PAGE> 12
Revenues. Revenues decreased 2.5% for the thirteen-week period ended
June 26, 1999 to $131.2 million from $134.6 million for the comparable period in
1998 as increases in revenues from the Company's core catalogs of $3.0 million
or 2.4% were more than offset by revenue decreases from the Company's non-core
catalogs. Revenues from non-core catalogs decreased to $6.4 million from $12.7
million in the prior year period. The Company circulated 75 million catalogs
during both the 1999 and 1998 periods.
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 62.7% of revenues for the second quarter ended June 26, 1999
compared to 62.2% of revenues for the same period in 1998. These results reflect
higher costs related to strategic initiatives (including fixed distribution
costs of the third party fulfillment business as well as systems development and
support costs). This was partially offset by higher catalog margins provided by
the Company's core catalogs.
Selling expenses decreased to 26.0% of revenues in the second quarter
of 1999 from 27.6% for the comparable period in 1998. This decrease reflects
improved catalog productivity resulting from more targeted circulation
strategies as well as the repositioning of non-core catalogs to e-commerce.
The number of customers having made a purchase from the Company's
catalogs in the 12 months preceding June 26, 1999 remained at approximately 4
million, consistent with December 26, 1998.
General and administrative expenses were 12.1% of revenues for the
second quarter of 1999 versus 10.2% for the comparable period in 1998. The 1.9%
increase reflects higher marketing, legal and MIS costs primarily related to the
Company's strategic initiatives.
Depreciation and amortization decreased to 1.7% of revenues for the
second quarter of 1999 versus 1.8% for the comparable period in 1998.
Loss from Operations. The Company recorded a loss from operations of
$(3.3) million for the second quarter ended June 26, 1999 or (2.5%) of revenues,
compared to a loss from operations of $(2.4) million for the comparable period
in 1998 or (1.8%) of revenues. The Company's loss from operations consists of
the following segment results:
- - Brand Marketing: Income from operations of $1.7 million is primarily due to
higher demand and margins for core catalogs and the 1999 repositioning of
non-core catalogs, partially offset by costs related to strategic
initiatives (primarily internet).
- - Web Services: Loss from operations of $(5.0) million reflects costs related
to strategic initiatives (primarily start up of the third party fulfillment
business). These include fixed distribution costs as well as systems
development and support costs.
Interest Expense, Net. Interest expense, net increased $0.1 million in
the second quarter of 1999 compared to the same period last year.
Income Taxes. The Company recorded a state tax provision of $0.2
million and $0.3 million in each of the thirteen-week periods ended June 26,
1999 and June 27, 1998, respectively.
12
<PAGE> 13
RESULTS OF OPERATIONS--TWENTY-SIX WEEKS ENDED JUNE 26, 1999 COMPARED WITH
TWENTY-SIX WEEKS ENDED JUNE 27, 1998
<TABLE>
<CAPTION>
26 WEEKS ENDED
-------------------------
JUNE 26, JUNE 27,
1999 1998
---- ----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales and operating expenses 63.4 62.8
Selling expenses 25.5 27.4
General and administrative expenses 11.7 10.1
Depreciation and amortization 1.8 1.8
Loss from operations (2.4) (2.1)
Interest expense, net (1.3) (1.4)
Net loss (3.9)% (3.7)%
</TABLE>
Net Loss. The Company reported a net loss of $(10.0) million or
$(.05) per share for the twenty-six weeks ended June 26, 1999 compared with a
net loss of $(9.5) million or $(.05) per share for the comparable period last
year. The per share amounts were calculated based on weighted average shares
outstanding of 210,539,416 and 203,885,594 for the current year and prior
period, respectively. This increase in weighted average shares was due to an
exercise of warrants in July 1998 by Richemont Finance S.A.
The net loss for the twenty-six weeks ended June 26, 1999 was
primarily the result of the seasonality of the Company's business and increased
costs (of approximately $5.5 million) related to the Company's strategic
initiatives, which include e-commerce, as well as underabsorbed overhead costs
related to the start-up of the Company's third party fulfillment business. These
losses were partly offset by higher demand for the Company's core catalog
offerings and 1999 earnings versus 1998 losses associated with the Company's
non-core catalogs. The seasonality of the Company's business is such that the
sales volume achieved during the first six months of the year are not sufficient
to cover both its fixed costs and the costs for its strategic initiatives for
such period.
Compared to the comparable period last year, the increase in net loss was
primarily due to:
(i) costs related to the Company's strategic initiatives
partially offset by,
(i) better catalog productivity
(ii) higher catalog margins
(iii) 1999 earnings versus 1998 losses from non-core catalogs
Revenues. Revenues were $259 million for both twenty-six week
periods ended June 26, 1999 and June 27, 1998 as increases in revenues from
core catalogs were offset by decreases in revenues from non-core catalogs.
Revenues from core catalogs increased by $11.8 million or 5.1% while revenues
from non-core catalogs decreased to $14.8 million from $26.8 million in the
prior year period. The Company circulated 144 million catalogs during the 1999
period versus 149 million catalogs in the prior year period reflecting the
repositioning of non-core catalogs to e-commerce.
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<PAGE> 14
Operating Costs and Expenses. Year-to-date cost of sales and operating
expenses increased to 63.4% of revenues for the six months ended June 26, 1999
compared to 62.8% of revenues for the same period in 1998. These results reflect
higher costs related to strategic initiatives (including fixed distribution
costs of the third party fulfillment business as well as systems development and
support costs). This was partially offset by higher catalog margins provided by
the Company's core catalogs.
Selling expenses decreased to 25.5% of revenues in the first six
months of 1999 from 27.4% for the comparable period in 1998. This decrease
reflects improved catalog productivity as a result of more targeted circulation
strategies as well as the repositioning of non-core catalogs to e-commerce.
The number of customers having made a purchase from the Company's
catalogs in the 12 months preceding June 26, 1999 remained at approximately 4
million, consistent with December 26, 1998.
General and administrative expenses were 11.7% of revenues for the
first six months of 1999 versus 10.1% for the comparable period in 1998. The
1.6% increase reflects higher marketing, legal and MIS costs primarily related
to the Company's strategic initiatives.
Depreciation and amortization remained at 1.8% of revenues for the
first six months of 1999 and for the comparable period in 1998.
Loss from Operations. For the twenty-six week period ended June
26, 1999, the Company recorded a loss from operations of $(6.1) million or
(2.4)% of revenues compared to a loss from operations of $(5.3) million for the
comparable period of 1998 or (2.1)% of revenues. The Company's loss from
operations reflects the following segment results:
- - Brand Marketing: Income from operations of $2.5 million was primarily due
to higher demand and margins for core catalogs and the 1999 repositioning
of non-core catalogs, partially offset by costs related to strategic
initiatives (primarily internet).
- - Web Services: Loss from operations of $(8.6) million reflects costs related
to strategic initiatives (primarily start up of the third party fulfillment
business). These include fixed distribution costs as well as systems
development and support costs.
Interest Expense, Net. Interest expense, net decreased by $0.2 million
compared to the same period in 1998.
Income Taxes. The Company recorded a state tax provision of $0.4
million and $0.5 million in each of the six month periods ended June 26, 1999
and June 27, 1998.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
At June 26, 1999, the Company had $7.1 million in cash and cash
equivalents compared with $12.2 million at December 26, 1998. Working capital
and current ratio were $45.3 million and 1.59 to 1 at June 26, 1999 versus $43.9
million and 1.47 to 1 at December 26, 1998. Net cash used in operations during
the six months ended June 26, 1999 of $11.1 million was primarily the result of
significant payments made to suppliers to ensure a consistent flow of product
during 1999 as well as the necessary spending for the development of the
Company's e-commerce and third party fulfillment initiatives. Cash was also used
to fund a seasonal increase in catalog costs. This cash spending was partially
offset by the planned reduction of inventory levels and by the Company's more
aggressive inventory liquidation strategy during the period. In addition, cash
collections from customers and from the Company's upsell activities mitigated
the impact of the cash spending during the period. Although $2.3 million
related to Shopper's Edge upsell activities is restricted, the Company is
entitled to periodic withdrawals of commissions. The Company also incurred
capital expenditures of $1.0 million during the six-month period ending
June 26, 1999.
The Company utilized $8.5 million of net borrowings for the six months
ended June 26, 1999 under the Congress Revolving Credit Facility to fund
seasonal working capital requirements. This amount was less than the $22.6
million of borrowings in the comparable period during the prior year primarily
due to lower inventory carrying levels as well as lower capital expenditures.
The total amount outstanding under the Congress Revolving Credit Facility at
June 26, 1999 was $8.5 million, compared with $0 at December 26, 1998. Remaining
availability under the Congress Revolving Credit Facility at June 26, 1999 was
$26.8 million ($33.9 million including cash on hand).
In March 1999 Richemont agreed to extend its letter of credit guarantee
to March 31, 2000. As consideration for this transaction, the Company agreed to
pay Richemont a facility fee of 9.5% of the principal amount of each letter of
credit.
The Company's ability to continue to improve upon its prior year's
performance and implement its business strategy is critical to maintaining
adequate liquidity.
YEAR 2000 ISSUE
As is the case with most other database marketing firms and, for the
most part, other businesses using computers and telecommunications equipment in
their operations, the Company is in the process of addressing the Year 2000
problem to ensure it will be able to continue to perform its critical functions
specifically: receiving, processing and shipping customer orders, ordering and
receiving merchandise from vendors, and processing payments.
The Company's Year 2000 project commenced in 1996 and was divided into the
following phases:
1) Discovery - identification/inventorying of all systems with potential Year
2000 issues,
2) Assessment - evaluation, categorizing and prioritizing of Year 2000 issues,
3) Remediation - modifying or replacing existing systems, and
4) Testing/Deployment - comprehensive testing of Year 2000 readiness to ensure
all problems were discovered and adequately corrected.
At the present time, the Company is presently in the late stages of the
remediation and testing/deployment phases for its information technology
infrastructure, which should be completed by October 1999.
15
<PAGE> 16
Additionally, the Company has performed surveys of its suppliers to determine
their Year 2000 readiness. At the present time over 90% of the top 100 suppliers
represented their products and services to be Year 2000 compliant. The Company
is following up with the remaining suppliers while it also conducts searches for
alternate suppliers. Also contingency plans are still under review and some
redundant services have been installed.
While the Company believes it is not likely to encounter any significant
operational problems, there is no guarantee that a Year 2000 related failure
will not arise. This uncertainty is due, to a large extent, to the uncertainty
surrounding potential third party related Year 2000 problems as well as the
Company's potential failure to discover all its own susceptible internal
systems.
While the Company expects that its efforts will provide reasonable assurance
that material disruptions will not occur, as previously discussed, the potential
for interruption still exists.
16
<PAGE> 17
ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
17
<PAGE> 18
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 annual meeting of stockholders was held in New York, New
York on May 6, 1999. 198,614,670 shares of Common Stock, or 94.6% of outstanding
shares, were represented in person or by proxy.
1. The following eleven directors were elected to a one-year term expiring in
2000.
<TABLE>
<CAPTION>
NUMBER OF SHARES
---------------------------------
FOR AGAINST
--- -------
<S> <C> <C>
Ralph Destino 198,319,069 295,601
J. David Hakman 198,319,069 295,601
Rakesh K. Kaul 198,316,859 297,811
June R. Klein 198,318,048 296,622
Kenneth Krushel 198,317,669 297,001
Theodore H. Kruttschnitt 198,319,069 295,601
Shailesh J. Mehta 198,317,669 297,001
Jan P. du Plessis 184,744,599 13,870,071
Alan G. Quasha 198,316,151 298,519
Howard M. S. Tanner 198,319,069 295,601
Robert F. Wright 198,319,069 295,601
</TABLE>
2. The approval of an amendment to the Company's Certificate of Incorporation
to increase the number of shares of all classes of stock which the Company
would have authority to issue from 243,172,403 to 318,172,403 and the
number of shares of Common Stock within such shares from 225,000,000 to
300,000,000 shares: 197,389,717 voted in favor; 1,123,585 voted against;
and 101,368 shares abstained.
3. The approval of Arthur Andersen LLP as independent accountants for fiscal
year 1999: 198,311,893 voted in favor; 236,663 voted against; and 66,114
shares abstained.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
None.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER DIRECT, INC.
Registrant
By: /s/ Brian C. Harriss
-----------------------------
Brian C. Harriss
Senior Vice-President and
Chief Financial Officer
(On behalf of the Registrant and as principal financial officer)
Date: August 10, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND
STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 26, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-25-1999
<PERIOD-END> JUN-26-1999
<CASH> 7,127
<SECURITIES> 0
<RECEIVABLES> 19,140
<ALLOWANCES> (1,713)
<INVENTORY> 53,310
<CURRENT-ASSETS> 122,361
<PP&E> 89,057
<DEPRECIATION> (42,034)
<TOTAL-ASSETS> 199,741
<CURRENT-LIABILITIES> 77,066
<BONDS> 0
6,223
0
<COMMON> 140,772
<OTHER-SE> (88,896)
<TOTAL-LIABILITY-AND-EQUITY> 199,741
<SALES> 258,951
<TOTAL-REVENUES> 258,951
<CGS> 164,204
<TOTAL-COSTS> 100,891
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (6,144)
<INTEREST-EXPENSE> (3,480)
<INCOME-PRETAX> (9,624)
<INCOME-TAX> (394)
<INCOME-CONTINUING> (10,018)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,018)
<EPS-BASIC> (.05)
<EPS-DILUTED> (.05)
</TABLE>
